Hedge Funds Scramble For Cover As Internet Stocks Tank

Two months of hedge fund de-risking seems to have ended with gross exposure falling back in line with the market, but looking back at exposure from the beginning of the year the de-risking seems like the end of tactical long positions more than actual low exposure.

US hedge fund gross exposure pulled away from the market at the beginning of the year, tracked it during February’s sell-off, and then piled on even more risk for the first half of March. De-risking from the middle of March through early April shows hedge funds bringing their exposure back in line with market movements.

Hedge funds: Exposure to internet stocks continues to fall

While hedge fund exposure has stabilized relative to the market, it has plummeted relative to US internet services and software stocks (think Facebook Inc (NASDAQ:FB), Netflix, Inc. (NASDAQ:NFLX), Twitter Inc (NYSE:TWTR) which mostly underperformed the market in recent months. Net exposure has been falling since last summer, but gross exposure is also falling sharply from its late December peak, implying that not only do hedge funds not want to own internet stocks, they don’t want to be involved at all. With high valuations that can jump and dive on investor sentiment, it’s hard to blame them.

Investors anticipate better environment for stock picking

Investor sentiment has remained strong, with hedge funds, mutual funds, and other alternatives all seeing net inflows in recent weeks, with hedge funds gaining $26.6 billion in 1Q14 bringing the hedge fund industries total assets under management to $2.7 trillion. Long/short funds in particular are gaining traction as investors realize that simply riding the market won’t be as effective this late into a bull market.

Kinderlerer also sees strong demand for event-driven funds, including activist and merger arbitrage, while global macro strategies are losing some of their luster because of recent underperformance making it one of the few strategies to have a year-on-year drop in AUM. As with any product, strong demand is met with a growing supply and Kinderlerer notes that the “hedge fund start-up pipeline is very robust, with a number of high profile launches coming to the market in the first half of 2014.”